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The US in another dilemma: will Malaysia catch cold this time
Malaysia Perspective | 14 October 2008

The US economic issue appears to be sinking into another dilemma – the US$700b rescue plan recently introduced by President George W. Bush, though supported by Federal Reserves chairman Ben Bernanke as a measure to avoid a recession, was opposed by many free-market advocates amongst politicians and economists.

For us in this region, our main concern would definitely be whether or not this new development will affect Malaysia and Asean economies more significantly than what has happened over the last four quarters.

All these surfaced less than a month after official figures were released showing that the US economy grew beyond expectation in the second quarter of this year, by 3.3% seasonally adjusted annual rates. Those who just took it as it is may have overlooked that the growth was supported by tax rebates paid out during the quarter and the reduced trade gap.

These two factors might not be repeated in the remaining quarters of this year. First, there will definitely not be any more tax rebate until year end. And second, the US dollar started to strengthen since the beginning of the current quarter, hence the reason for the reduced trade gap, i.e. a weakening of the greenback, may be absent as well.

And Bernanke warned the Congress recently of a possible recession in the United States due to a fragile US financial market which will get worse, unavailability of credit, a housing market that has not recovered and employees who continue to lose jobs.

In fact, unemployment rate in the United States skyrocketed from as low as 4.4% in March 2007 and 4.8% in February 2008 to 6.1% in August 08, the highest level since August 2003. The rising unemployment rate also affected consumer confidence in the United States where the US Conference Board’s index has plummeted from as high as 112.5 in February 2007 to only 56.9 in August 2008.

The Bush-administration economic rescue plan has been labelled by many as a “bail-out”. With the opposition it faces, one wonders again whether this will be successfully implemented. Although the financial market may have taken the brunt with the US equity market having fallen since reaching its peak in October last year, the real economy may start to feel the real pinch now. Perhaps this lends credence to the adage that the financial market is a leading indicator to the economy.

The issue is whether what is happening in the United States will be “exported” to other parts of the world, Asean and Malaysia included. Malaysia also registered respectable growth rates despite all the global uncertainties. However, the last two quarters have shown signs of a possible slowdown going forward.

With Malaysia registering a real GDP growth of 6.7% in the first half of 2008, Prime Minister Dato’ Seri Abdullah Ahmad Badawi (as then Finance Minister) presented the 2009 Budget and forecasted GDP growth of 5.7% this year, taking into account the global uncertainties and rising inflation.

This further confirms that even the administration is bracing itself for a slowdown, as the forecast simply means that real GDP growth in the second half would be 4.7%. As a comparison, quarterly year-on-year growth had been above 5.0% since the third quarter of 2005.

However, as Dato’ Seri Mohd Najib Tun Abdul Razak rightly put it in his maiden press conference as the new Finance Minister, the current slowdown’s impact on Malaysia will not be as bad as the United States as our financial institutions are not overly exposed to derivatives.

In fact, as per reports that we monitor, only one Malaysia incorporated bank had once an exposure to the US sub-prime mortgage issue, and even then it was less than US$100m.

However, the main challenges to the Malaysian economy, hence its policy makers, are currently on the following:
i) rising inflation that has accelerated since May 2008 which affects the spending power of the people, hence real spending;
ii) The lower real spending as a result of the above on domestic manufacturers and services providers;
iii) sustaining growth in exports at a time when a slowdown in G3 (the United States, Euro countries and Japan) appears to be continuing (there is even a suggestion that slowdown in G3 countries may last until end of 2009); and
iv) the continuing turmoil in the global financial markets which may make it more expensive and perhaps more difficult to raise new capital globally.

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